Tesco vs Unilever price spat: everybody loses

The ugly conflict between the UK's biggest retailer and its biggest consumer products firm will benefit no one. Well, no one except for Procter & Gamble...

by Adam Gale

Published: 14 Oct 2016

Last Updated: 14 Oct 2016

Update: The Unilever-Tesco spat lasted but a day, with Unilever confirming it was resuming shipments to Tesco on October 14. The result? An anti-climatic but really rather predictable compromise, the terms of which are unknown.

Who won? Well on the public opinion front Tesco scored points, but neither will look back at it as their finest hour. It's to their credit, however, that they managed to prevent the disupte from drawing out any further.

I like Marmite and I shop at Tesco. But do I like Marmite enough to shop somewhere else if Tesco stops stocking it?

That’s the question vexing executives at both Tesco and Marmite-maker Unilever after the consumer goods giant reportedly demanded a 10% price hike across a range of products as diverse as Dove, Magnums and Persil, to compensate for the post-Brexit slump in the pound.

In a classic case of irresistible force meets immovable object, Tesco refused. Unilever products became unavailable at Tesco online, with speculation that shelves could soon begin to empty. For both retailer and consumer goods maker, this is fairly apocalyptic stuff. You can almost hear the laughter from Unilever's archrival Procter and Gamble’s Cincinnati headquarters...

Commercially, this is a lose-lose situation. Tesco will drive away some trade by being the store that doesn’t sell Sure deodorant and Ben & Jerry’s ice cream. In happier times it might (just) have been able to stomach that, but not now.

Although of comparable size, Unilever benefits from much bigger margins and the fact that 95% of its business is outside the UK. However, while Tesco can promote its own brands or P&G rivals in place of Unilever’s absent products, the Anglo-Dutch consumer giant has no way of salvaging the lost trade. It also reports in euro - so just like British holidaymakers on the continent, its pounds aren't stretching as far as they used to.

Given that Tesco has 28% of the UK groceries market, it follows that it represents around €1.5bn (£1.35bn) of totally lost business. Try telling Unilever’s jittery shareholders that this spat is hurting Tesco more.

Eventually of course they will come to a deal – they have to. The only questions are when and on what terms. But until they do, both firms will have to deal with not only lost profits but also a blow to their reputations.

After all, supplier-buyer conflicts are hardly new for either firm (how many smaller or own-brand suppliers, one wonders, have had to silently absorb the costs of more expensive imports at Tesco’s command?). What’s different about this spat is that it’s being conducted in full view of the court of public opinion.

It may deny this and say that the price rises fall well short of covering its forex-related losses, but ultimately most consumers will see only one business trying to force prices up and another trying to keep them down. It’s not hard to see which side they’ll sympathise with, although in reality the argument is not whether the prices are going to rise but who's going to pick up the tab.

That may cost not cost Unilever too many customers in the short term, but remember this is a company that prides itself on its good standing – something Lewis knows all too well.

Indeed, Unilever was voted Britain’s Most Admired Company 2015 by a vote of its peers (2016’s results will be announced in early December –watch this space). Have no doubt that CEO Paul Polman will not be happy about what’s going on.

When a deal is made, customers will lose out too. To expect the post-Brexit drop in the pound to have no negative consequences would be naive. Something has to give, and Tesco (and the other grocers, who will be following this closely) simply hasn’t the margins to do anything other than pass on whatever price rise is eventually agreed – which is ultimately something no one wants.

And if you're running out of Marmite, don't worry. Stocks of Aussie equivalent Vegemite are running high (if you're into that sort of thing).